Controlling Corruption in Europe

Controlling Corruption in Europe The Anticorruption Report Volume 1

Alina Mungiu-Pippidi (editor) Controlling Corruption in Europe The Anticorruption Report 1 written by Alina Mungiu-Pippidi Roxana Bratu Nicholas Charron Valentina Dimulescu Madalina Doroftei Mihály Fazekas Aare Kasemets Lawrence Peter King Roberto Martínez B. Kukutschka Raluca Pop István János Tóth Barbara Budrich Publishers Opladen Berlin Toronto 2013

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Contents Executive summary.......................... 7 1. Methodology.............................. 9 2. European Union Member States.................... 14 3. THe South-Eastern Europe....................... 48 4. The Former Soviet Union........................ 55 5. Top of the Class. The Case of Estonia................. 68 6. Hidden Depths. The Case of Hungary................. 74 7. Bottom of the Heap. The Case of Romania............... 83 8. European Perceptions of Quality of Government: A Survey of 24 Countries............... 99 9. Lessons Learned. The Good, the Bad and the Ugly........... 121 Acknowledgements........................... 128

1. Methodology Defining corruption is such a controversial business that the United Nations Convention against Corruption (UNCAC, put into force on 14 December 2005) does not even attempt it, stating instead in article 1.c that it will promote integrity, accountability and proper management of public affairs and public property. It also states in articles 7 (public sector) and 9 (procurement), the modern principles of efficiency, transparency, merit, equity and objectivity as the only accepted norms for governance. The European Union signed the United Nations Convention against Corruption (UNCAC) in 2005. The most frequent definition of individual corruption in current literature is the abuse of public office for private gain (Tanzi & Davoodi 1997), with variants such as abuse of power or abuse of entrusted authority. Corruption is nearly always defined as a deviation from the norm (Scott 1972) because it presumes that authority or office are entrusted to someone not to promote private gain of any kind (for self or others) but to promote the public interest, in fairness and impartiality. In the current report we define control of corruption as the capacity of a society to constrain corrupt behaviour in order to enforce the norm of individual integrity in public service and politics and to uphold a state which is free from the capture of particular interests and thus able to promote social welfare. One more report on corruption might seem superfluous, as evidence shows that corruption is resilient and does not easily change from year to year. There is, however, a certain novelty to our approach, which is grounded in some of the previous work by the World Bank (Klitgaard 1988; Tanzi & Davoodi 1997; Huther & Shah 2000), but rather different from some of the current anticorruption approaches, for by using theory and inferential statistics we have outlined the causes and consequences of corruption. We have eliminated structural causes which cannot be changed such as the age of a democracy, the former presence of a Communist regime, modernization features and so on, and have developed a powerful explanatory model based only on such factors as can be influenced by human agency. We have then used our statistical model to propose recommendations which can address not only the corruption that is the end result but the whole complex of factors explaining why corruption is not checked by a particular government and society. In other words we point out where control of corruption fails. Control of corruption is a complex equilibrium and the lack of progress during the last fifteen years of anticorruption is due at least in part to the illusion that a few silver bullets can fix it, while its deeper causes are ignored. Corruption cannot be measured directly due to its elusive and informal nature (a socially undesirable and hidden behaviour) and the difficulty of separating the control 9

of corruption from corruption itself. For instance, if Germany has opened more files on the basis of the OECD anti-bribery convention than other EU countries, does that mean that German businessmen more commonly offer bribes when doing business abroad, or that Germany has actually been more active in enforcing the convention when compared to other countries? The same applies to the number of convictions: notoriously corrupt countries have convicted very few people for corruption, as the judiciary is itself part of the corrupt networks of power and privilege. Due to such limitations therefore, corruption is currently measured in three broad ways: By gathering the informed views of relevant stakeholders. They include surveys of firms, public officials, experts and citizens. Those data sources can be used separately or in aggregate measures which combine information from many places such as Transparency International s Corruption Perception Index or the World Bank Control of Corruption. Many such sources exist, and they have been aggregated in the two mentioned indexes since 1996. Those are in fact the only available data sources that currently permit large-scale trans-national comparisons and monitoring of corruption over time. By surveying countries institutional arrangements, such as procurement practices, budget transparency, and so on. That does not measure actual corruption but rather the risk of corruption occurring. The country coverage is limited to certain developing countries and is not regularly updated. Examples include Global Integrity Index, or the national Integrity Systems of Transparency International. By audits of specific sectors or projects with the goal of understanding if the allocation of public resources is fair and universal, or particularistic and corrupt. They can be purely financial audits or more specific assessments to measure the efficiency or impartiality of public investment. Such audits can provide information about malfeasance in specific projects but cannot be generalized to more general country-wide corruption, so they are not suited to comparisons between countries nor for monitoring over time (Kaufmann, Kraay & Mastruzzi 2006). Table 1. Indicators for measuring corruption by data collection type INDICATORS Perception of corruption, experts, general population, firms Comparison across countries YES Comparison across time or before/after intervention YES, but not fully reliable, as we have proof that other factors matter (for instance, the perceived economic situation) Observations Highly relevant, but also highly subjective Experience of corruption experts, general population, firms, government agencies, state units YES YES; some limitations apply related to openness in confessing socially undesirable behaviour Both relevant and objective, with the problem of low response (underreporting) to overcome 10

Institutional control of corruption features (permanent and response driven) YES Very limited; we have evidence that no correlation exists between institutional equipment for controlling corruption and corruption itself Highly objective, but frequently irrelevant; those proposed here were all tested for significance in relation with CPI, ICRG or CoC Audits and investigations NO YES, if repeated Should be organized on specific problems/ countries A good study of corruption in a country should triangulate carefully, by employing all the above methods. We have a few such studies from Europe, mostly for Italy and new member countries from post-communist Europe. The challenge remains of acquiring data to allow comparison between countries, and over time which allows us to record change, and current indexes are not very good at that. Transparency International s (TI) Corruption Perception Index (CPI) cannot be used to compare over time and the World Bank s Control of Corruption (CoC) is notoriously insensitive to change. Until suitable indicators are developed, tracing the progress of anticorruption policies by sector or by country over time will remain a challenge. However, discarding the data that is available as being based merely on perception is wrong. Both experience and perception data can be reported and may be compared, and if in separate measurements experts and the general population rate a country similarly it becomes obvious that perceptions are based on similar experience and therefore grounded in reality. Table 2 shows the correlations between measurements which differ widely in method and time: Control of corruption and CPI, aggregated index scores, a World Economic Forum expert survey score and two general population surveys, TI s Global Corruption Barometer (GCB) and the Eurobarometer. Those questions asking for an assessment of corruption at national level correlate significantly at over 70 so they are highly consistent across sources. Other questions are more ambiguously phrased which has led to survey error, for example in the Eurobarometer major national problem question which leaves the definition of major up to respondents. However, the relationship between surveys by experts and those by citizens over different years and even with varying vocabulary is, by and large, remarkably consistent and validates corruption indexes and perception indicators provided always that the questions put are professional, not vague and not leading. Such a validation process is necessary because we plan to use one of those indexes, Control of Corruption, as our main dependent variable in this analytical exercise. Furthermore, due to the scarcity of data down the years our analysis is necessarily limited to a cross sectional analysis of EU member states. In other words, we have 27 observations as many as the member states. Nevertheless our statistical model was tested on the Hertie School global database of 191 countries and once again the results were remarkably consistent, proving that the data can be safely used for this analysis. 11

Table 2. Correlations between different corruption indicators Source N Diversion of public funds, 1-7 (best) Corruption Perception Index (TI) Quality of government WGI Control of Corruption estimate (2010) of respondents who agree that there is corruption in regional institutions of respondents who agree that there is corruption in local institutions of respondents who agree that there is corruption in national institutions of respondents who agree that corruption is a major problem in the country Perception of corruption political parties Perception of corruption public officials Global Corruption Barometer (2010) 1 21 Perception of corruption public officials Global Corruption Barometer (2010),731** 1 21 Perception of corruption political parties -,730** -,829** 1 27 Eurobarometer 374 (2011) of respondents who agree that corruption is a major problem in the country,749**,847** -,948** 1 27 Eurobarometer 374 (2011) of respondents who agree that there is corruption in national institutions,756**,855** -,949**,982** 1 27 Eurobarometer 374 (2011) of respondents who agree that there is corruption in local institutions,748**,857** -,907**,970**,961** 1 27 Eurobarometer 374 (2011) of respondents who agree that there is corruption in regional institutions Worldwide Governance Indicators (2010) -,722** -,707**,782** -,784** -,816** -,778** 1 27 WGI Control of Corruption estimate (2010) Quality of government -,677** -,626**,706** -,691** -,737** -,687**,951** 1 27 ICRG (2010) Corruption Perception Index (2010) Perception of corruption (TI) -,722** -,699**,780** -,777** -,810** -,765**,991**,931** 1 27 Global Competitiveness Report (2010-11) -,706** -,690**,749** -,766** -,788** -,776**,960**,913**,962** 1 27 Diversion of public funds, 1-7 (best) ** Correlation is significant at the 0.01 level (2-tailed) 12

This first Anticorruption Report covers the European continent. We divided it for study in three areas: European Union member states South-Eastern Europe and former Soviet Union. This division is justified by the different legal and political regimes operating in these three areas. From an EU perspective, an EU anticorruption policy exists in nearly all this territory, either under the anticorruption mechanism of the European Commission (EU member states, managed by DG Home), or enlargement or EU neighbourhood policy (Russia is an exception). The report will present comparative data on all three regions, followed by a succession of three case studies in relation to the European Union: a problem country for both corruption and EU funds (Romania), an average country which surveys and our field research show to be more problematic than previously believed (Hungary) and a champion of anticorruption, the global achiever of good governance, Estonia. References Kaufmann, Daniel; Kraay, Aart & Mastruzzi, Massimo 2006: Measuring Corruption: Myths and Realities, World Bank, Washington, DC Klitgaard, Robert 1988: Controlling Corruption, Berkley CA: University of California Press Huther, Jeff, & Shah, Anwar 2000: Anticorruption Policies and Programs: A Framework for Evaluation, Policy Research Working Paper 2501, World Bank, Washington, DC Tanzi, Vito & Davoodi, Hamid R. 1997: Corruption, Public Investment, and Growth, IMF Working Paper 97/139 Scott, James C. 1972: Political Corruption, Englewood Cliffs, N.J., Prentice-Hall The List of Data Sources Bertelsmann Stiftung, Bertelsmann Sustainable Governance Indicators - <www.sgi-network.org/> European Commission, Digitizing Public Services in Europe: Putting ambition into action- 9th Benchmark Measurement - <ec.europa.eu/information_society/newsroom/cf/itemdetail. cfm?item_id=6537> Eurostat - <www.ec.europa.eu/eurostat> Freedom House, Freedom in the World - <http://www.freedomhouse.org/report-types/ freedom-world> Hertie School of Governance, Contextual Choices in Fighting Corruption: Lessons Learned - <www.hertie-school.org/facultyandresearch/projects/research-projects/transitions-to-goodgovernance-contextual-choices-in-fighting-corruption> International Labour Organization, Laborsta database - <laborsta.ilo.org/default.html> Inter-Parliamentary Union, Women in national Parliament data - <www.ipu.org/wmn-e/ classif-arc.htm> Quality of Government Institute, QoG standard database and QoG basic database - <www.qog. pol.gu.se/data/datadownloads> Romanian Academic Society - <www.sar.org.ro> Special Eurobarometer Survey 374, Corruption - <ec.europa.eu/public_opinion/archives/ebs/ ebs_374_en.pdf> Standard Eurobarometer 72, - <http://ec.europa.eu/public_opinion/archives/eb/eb72/eb72_en.htm> Transparency International, Corruption Perception Index 2010 and Global corruption Barometer 2010 - <www.transparency.org> World Bank database - <data.worldbank.org> World Economic Forum, Global Competitiveness Report 2010-2011 - <www3.weforum. org/docs/wef_globalcompetitivenessreport_2010-11.pdf> Worldwide Governance Indicators - <www.govindicators.org> 13

Annex 1. Full Variable Description for Chapter 2 European Union Member States Variable Scale / Unit Definition Source N Control of Corruption Perception of Corruption on Public Officials 1 (worst) - 10 (best) 1 (not at all corrupt) - 5 (extremely corrupt) Reflects perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests. Aggregates the responses to the question "To what extent do you perceive the PUBLIC OFFICIALS in this country to be affected by corruption?" Respondents were asked to evaluate each of the institutions in a scale from 1 (not at all corrupt) to 5 (extremely corrupt) and this indicator represents a weighted average of the responses. Worldwide Governance Indicators 27 Global Corruption Barometer 2010 21 Perception of Corruption of Political Parties 1 (not at all corrupt) - 5 (extremely corrupt) Aggregates the responses to the question "To what extent do you perceive the POLITICAL PARTIES in this country to be affected by corruption?" Respondents were asked to evaluate each of the institutions in a scale from 1 (not at all corrupt) to 5 (extremely corrupt) and this indicator represents a weighted average of the responses. Global Corruption Barometer 2011 21 Corruption is a major problem in the country Corruption in national institutions Aggregates the number of respondents who "totally agree" or "tend to agree" with the statement "corruption is a major problem in the country". Aggregates the number of respondents who "totally agree" or "tend to agree" with the statement "There is corruption in national institutions in our country". Aggregates the number of respondents who "totally agree" or "tend to agree" with the statement "There is corruption in local institutions in our country". Eurobarometer 374 27 Eurobarometer 374 27 Corruption in local institutions Corruption in regional institutions Quality of Government 0 (lowest) - 1 (highest) Aggregates the number of respondents who "totally agree" or "tend to agree" with the statement The mean value of the ICRG variables Corruption, Law and Order and Bureaucracy Quality. Eurobarometer 374 27 Eurobarometer 374 27 ICRG 27

Corruption Perception Index 0 (highly corrupt) - 10 (highly clean) The CPI focuses on corruption in the public sector and defines corruption as the abuse of public office for private gain. The surveys used in compiling the CPI tend to ask questions in line with the misuse of public power for private benefit, with a focus, for example, on bribe-taking by public officials in public procurement. The sources do not distinguish between administrative and political corruption. The CPI Score relates to perceptions of the degree of corruption as seen by business people, risk analysts and the general public. Weighted average of the answers to the question "In your country, how common is diversion of public funds to companies, individuals, or groups due to corruption?" Gross capital formation consists of outlays on additions to the fixed assets of the economy plus net changes in the level of inventories. Fixed assets include land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads, railways, and the like, including schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings. Inventories are stocks of goods held by firms to meet temporary or unexpected fluctuations in production or sales, and "work in progress." According to the 1993 SNA, net acquisitions of valuables are also considered capital formation. Includes government spending dedicated to medical products, appliances and equipment, outpatient services, hospital services, public health services and R&D in health. Transparency International Corruption Perception Index 27 Diversion of Public Funds 1 (very common) - 7 (never occurs) Global Competiveness Report 2010 27 Government investment in capital formation ( of GDP) World Bank Database 27 Government expenditure on health ( of GDP) Eurostat 27 Government budget balance ( of GDP) Overall result of a country's general government budget over a one year accounting period. It includes all government levels (from national to local) and public social security funds. The budget balance is the difference between government revenues (e.g., tax) and spending. Global Competiveness Report 2010 27 Tax revenue ( of GDP) Total tax revenue is the income a government generates through the taxation of the people. It includes taxes on production and imports, current tax on income and wealth, capital gains tax, and social contributions. Eurostat 27

Vulnerable employment ( of total employment) Vulnerable employment is unpaid family workers and ownaccount workers as a percentage of total employment. World Bank Database 27 Women in parliament Composition of the parliament at the end of year 2009. In bicameral systems data is taken for the lower house. Inter-Parliamentary Union Homepage 26 Brain-drain 1 (the best and brightest normally leave to pursue opportunities in other countries) - 7 (there are many opportunities for talented people within the country) Weighted average to the question: "Does your country retain and attract talented people?" Global Competiveness Report 2010 27 Absorption rate of EU funds Funds allocated per Member State that have been paid by the Commission, on the basis of claims submitted. It indicates payment rate for territorial cooperation. These are combined figures for the European Regional Development Fund, the Cohesion Fund and the European Social Fund. European Commission 27 Government favouritism Perception of corruption in daily life Ease of doing business 1 (always show favouritism) - 7 (never show favouritism) Rank (1-183) Weighted average of the responses to the question: "to what extent do government officials in your country show favouritism to well-connected firms and individuals deciding upon policies and contracts?" Respondents who "totally agree" or "tend to agree" that they are personally affected by corruption in their daily life. Provides a quantitative measure of regulations for starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business, as they apply to small and medium enterprises. Global Competiveness Report 2010 27 Eurobarometer 374 27 International Bank for Reconstruction and Development / World Bank 26

Trade barriers Days Trade barriers are measured in days required to import in calendar days. The time calculation for a procedure starts from the moment it is initiated and runs until it is completed. If a procedure can be accelerated for an additional cost, the fastest legal procedure is chosen. It is assumed that neither the exporter nor the importer wastes time and that each commits to completing each remaining procedure without delay. Procedures that can be completed in parallel are measured as simultaneous. The waiting time between procedures--for example, during unloading of the cargo--is included in the measure. World Bank Database 26 Basic public services for citizens fully available online Online availability and delivery of 20 basic public services: the extent to which there is fully automated and proactive delivery of the 20 key public services. The 20 services used as reference for benchmarking are: income taxes, job search services, social security benefits (unemployment benefits, child allowances, medical costs, student grants), personal documents (passports, driver's licence), car registration, application for a building permission, declaration to the police, public libraries(catalogues, search tools), (birth and marriage) certificates, enrolment in higher education, announcement of moving, health related services, social contribution for employees, corporate tax, VAT, registration of a new company, submission of data to statistical offices, customs declaration, environment related permits, public procurement. Capgemini, IDC, Rand Europe, Sogeti and DTi for the European Commission, "Digitalizing Public Services in Europe: Putting Ambition Into Action", 9th Benchmark Measurement 27 of population using e- government of respondents using e-government services. Capgemini for the European Commission DG for Information Society and Media, "The User Challenge Benchmarking: The Supply of Online Public Services- Seventh Measurement" 27 Strength of auditing and reporting standards 1 (extremely weak) - 7 (extremely strong) Weighted average of the answers to the question "how would you assess financial auditing and reporting standards regarding company financial performance?" Global Competiveness Report 2010 27

Public sector wages Salary of first instance judges Euros Ratio Own estimation of average salaries in the public sector, calculated based on government expenditure on compensation of employees (European Commission AMECO database, extracted on 20.11.12) and general government employment (ILO Laborsta database, extracted on 21.11.12). Data is from 2010, with the following exceptions: Hungary (2009), Croatia, Greece, Portugal and Switzerland (2008), Sweden (2007), and France (2006). Gross annual salary of 1st instance judges with regards to the national average gross annual salary. European Commission 19 European Commission 27 Civil Society Organizations per million people Ratio Number of civil society organizations per million inhabitants. CSO data was extracted from CIVICUS, a global network of civil society organizations active in the area of social and economic development. Grimes, M. Contestation or Complicity: Civil Society as Antidote or Accessory to Political Corruption. QoG Working Paper Series, 2008:8. 26 Voluntary work Respondents that answered "Yes" to the question: "Do you currently participate actively in or do voluntary work for one or more of the following organisations?" The organisations included in the list were: sports club or association, cultural, education or artistic association, charitable or social aid organisation, religious organisation, trade union, organisation for environmental protection, leisure association for the elderly, business or professional organisation, political party or organisation, interest groups for specific causes, international organisation, organisation defending the interests of patients and/or disabled people, consumer organisation, and organisation for the defence of the rights of elderly people. Standard Eurobarometer 72, Volume 2 27 Press freedom Newspaper readership 0 (most free) - 100 (least free) The index assesses the degree of print, broadcast, and internet freedom in every country in the world, analysing the events of each calendar year. Daily newspapers refer to those published at least four times a week and calculated as average circulation (or copies printed) per 1,000 people Freedom of the Press Index 27 World Bank Database 27 Internet users People with access to the worldwide network. World Bank Database 27

Acknowledgments The present policy report: The Anticorruption Report 1: Controlling Corruption in Europe is the first volume of the policy series The Anti-Corruption Report produced in the framework of EU FP7 ANTICORRP Project. The report was edited by Prof. Dr. Alina Mungiu- Pippidi from Hertie School of Governance, head of the policy pillar of the project. ANTICORRP is a large-scale research project funded by the European Commission s Seventh Framework Programme. The full name of the project is Anti-corruption Policies Revisited: Global Trends and European Responses to the Challenge of Corruption. The project started in March 2012 and will last for five years. The research is conducted by 21 research groups in sixteen countries. The fundamental purpose of ANTICORRP is to investigate and explain the factors that promote or hinder the development of effective anti-corruption policies and impartial government institutions. A central issue is how policy responses can be tailored to deal effectively with various forms of corruption. Through this approach ANTICORRP seeks to advance the knowledge on how corruption can be curbed in Europe and elsewhere. Special emphasis is laid on the agency of different state and non-state actors to contribute to building good governance. Project acronym: ANTICORRP Project full title: Anti-corruption Policies Revisited: Global Trends and European Responses to the Challenge of Corruption Project duration: March 2012 February 2017 EU funding: Approx. 8 million Euros Theme: FP7-SSH.2011.5.1-1 Grant agreement number: 290529 Project website: http://anticorrp.eu/ Due to the number and density of the annexes and references to sources we had to exclude many of them from the print version of this policy publication. The online versions of printshortened chapters (2, 4, 6, 7, 8) including all the annexes and full references are available at http://anticorrp.eu/ and www.againstcorruption.eu.